25 September 2008

GDI in recession already (better measure than GDP ?)

the measure of Gross Domestic Income is arguably a better measure of the health of the US economy than is Gross Domestic Product (which gets all the headlines and spin) here's why: if GDP were calculated by one person's economic activity, this is how the two would result...

an hourly-wage worker, works the same number of hours each month for $100, for 3 months, = $300 GDI if that worker spends all but $10 in the quarter the GDP would = $290. if that worker spends all but $10 but charges $10 on a credit card, the GDP would = $300. (or GDP = $310 if $20 in credit card charges were made)

if the worker's hours or wage were reduced, the GDI would recede
if the worker saved more and/or spent less, the GDI would remain constant, but the GDP would recede. the opposite would occur for GDP if the worker saved more, or even spent the same amount of wages, but charged more on credit during the quarter.

the same government agency that produces the GDP data, calculates the GDI. the common standard for 'recession' is two consecutive quarters of negative GDP. the first two quarters of 2008 have reported negative (declining) GDI.

fewer workers, fewer hours worked, wage reductions, transitions to lower-paying jobs, all contribute in some way to reduced GDI for 2008. more savings, less discretionary spending, less credit card spending, all serve to reduce the reported GDP. which makes a "recession" not purely a function of slower business activity, but also one of more responsible worker/consumer behaviours.